REUTERS | Mike Blake

Loss of profit – escaping from a bad bargain

Be wary. It is not easy to escape from an unprofitable contract (or “bad bargain”).

Unprofitable contracts

The construction industry may now be leaving its own long recession behind (or it may not). Whatever your particular experiences of the recession, it may have left you with contracts that are unprofitable (or, at least, less profitable) to perform.

Outside of the sphere of construction and engineering, one of the reasons for the sale of The Independent newspaper for just £1 was that its long-term print contract cost the paper’s owners more than the newspaper was able to generate in returns.

Escape routes closed

Unless you have a contractual right to terminate the contract, such as a right to terminate at any time on reasonable notice, you may be forced to look for cunning legal arguments that allow you to escape from an unprofitable contract. If you are in that situation, unfortunately, the courts have confirmed that the latest recession will not give you an easy way out.

Two recent decisions, which will not surprise seasoned litigators, reinforce the limited availability of arguments related to:

  • Frustration of contract.
  • Force majeure clauses.

Frustration

In Gold Group Properties Ltd v BDW Trading Ltd, the court was asked to find that the parties’ contract had been frustrated. The parties had entered into a development agreement for a mixed use commercial property development, only for the value of the land in question (and the projected selling price of the mainly residential units on that land) to fall spectacularly.

The court decided, in line with previous authorities, that the recession and fall in land values did not amount to frustration and the parties were bound by their agreement. This view was reinforced by the terms of the contract, which allowed for the selling prices of units to change, as the parties performed their obligations.

Force majeure

In Tandrin Aviation Holdings Limited and Aero Toy Store LLC, a purchaser of a plane asked a court to interpret a force majeure clause to allow it to not buy the plane. The court declined to do so, again in line with previous decisions: the financial crisis that immediately preceded the recession (and which prevented the purchaser from obtaining money to buy the plane) did not amount to force majeure. Once again, the court’s view was reinforced by its analysis of the particular terms of the parties’ contract.

What else? Be proactive

So, what else can a party stuck with a bad bargain do?

You are always free to try and renegotiate, but the other party to the contract may not be open to persuasion.

If the economics of your situation mean you must become a “contract-breaker”, be prepared to make an early, and significant, offer to settle. As painful as that may be, proactively offering a settlement can turn the tables on your prospective opponent, and bring them to negotiations. It may even dissuade them from taking formal court action.

Be wary of starting litigation, or defending a claim, on a basis that you do not think will succeed. Unsuccessful litigation results in irrecoverable lost management time, and the prospect of paying some or all of the other side’s legal costs, as well as your own.

2 thoughts on “Loss of profit – escaping from a bad bargain

  1. I entered into a construction contract in 2015 with a paid when certified clause. These type of clauses are now excluded under the Act (the Construction Act, as amended by the LDEDCA).

    I am sub-sub-contractor. The sub-contractor for whom I am working has withheld money and is seeking to rely on this clause.

    Does the Act trump the bad bargain argument?

  2. We explain about conditional payments (such as pay-when-certified) in Practice note, Payment in construction contracts: Construction Act 1996: Sections 110(1A) to (1D): conditional payments. You may also wish to look at the judgment in RMP Construction Services Ltd v Chalcroft Ltd [2015] EWHC 3737 (TCC). Although there was an issue about the parties’ contract, the court noted that if it contained a conditional payment clause, that clause would be “inoperable and inadequate”. This would mean the payment provisions of the Scheme for Construction Contracts 1998 would apply instead.

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